Sub-Prime Lending Never Died – Bizarre Story of World Acceptance, Stock Up 327%

Boy, don’t all of us wish we’d had the guts to buy bank stocks in the depths of the financial crisis? Choosing March 31, 2009 as a rough bottom, even Citigroup (C) and Bank of America (BAC), which remain relative basket cases to this day, would have brought you a roughly 50% gain. And the smarter banks would have reaped you bigger profits – 60% or so at JPMorgan (JPM) and 135% at Wells Fargo (WFC).

Not that amazing. What’s truly shocking is that a lender that does nothing but sub-prime loans is not only still in business, but its stock soared 327% since our chosen bottoming-out date. The company is World Acceptance (WRLD), and you may have thought that all such homely creatures had been wiped off the face of the planet by the financial crisis.

In fact, small loan shops have always prospered through a combination of hard work and hard hearts, extracting annual interest rates typically over 400 percent and putting borrowers in debt for more than half the year, as unpaid loans roll over and accumulate additional interest, according to the Center for Responsible Lending, one of the many critics of the industry. In tough times, borrowers with poor credit have few alternatives to payday lenders. In better times, they feel more willing to overextend themselves by taking out loans with exorbitant interest rates.

Founded in 1962, World Acceptance generally makes loans under $4,000 with maturities of less than 36 months. With 1,173 consumer loan offices in the U.S. and Mexico, the company saw a gross loan volume of $2.8 billion in fiscal 2012, according to the firm's web site. The average U.S. location serves just 786 accounts with 3.3 employees out of a strip mall or downtown office, with an average loan size of $1,211. This is the hand-to-hand combat zone of finance.

World Acceptance has benefitted from a resurgence of consumer interest in payday loans. For the fiscal year that ended March 31, World Acceptance reported a 10 percent increase in total revenue, at $540 million, up from $491 million in fiscal 2011. And the company's current PE ratio of about 10 may be higher than its lowest point during the recession, but it's still decent by historical standards.

World Acceptance's total assets have grown about 75 percent over the last five years to nearly $742 million. Profits have also climbed steadily throughout the recession, to $139 million. Loans delinquent greater than 61 days have been steady, a sign of collectors hard at work -- and good news for investors. Charge-offs as a percentage of average loans receivable were 14 percent for the most recent fiscal year, according to the company's investor presentation. That’s a lot, but when you charge 400% interest, the good payers more than make up for the deadbeats.

Not unlike a certain kitchen pest, which can withstand mammoth calamities that kill larger animals in the ecosystem, payday lenders like World Acceptance chugged along relentlessly during the financial crisis that brought down financial giants like Lehman Brothers and Washington Mutual. Maybe subprime lending belongs in the hands of smaller, specialty outfits, rather than being turbocharged by Wall Street. Left to its own devices, it’s hard on customers but potentially kind to investors.

To be sure, there's potential trouble ahead for World Acceptance and its ilk. President Barack Obama's reelection has surely disappointed those in the financial services industry who were hoping to neuter the Consumer Financial Protection Bureau, whose director Richard Cordray has vowed crack down on payday lenders. Instead, the CFPB is poised to continue its push for tough new rules to protect consumers from abuses and to expand access to consumer credit -- both potential downsides for payday lenders like World Acceptance, even if they're not directly impacted by new regulation.

Additionally, as the economy recovers and mainstream financial services companies face increased pressure to boost profits, World Acceptance and other payday lenders may face new competition from traditional banks. World Acceptance funds itself through lines of credit from Wells Fargo and Bank of America, so those banks already have exposure to consumers with lower credit scores, who pay higher interest and pose a greater risk of default.

Despite all that, some good news for payday lenders is the increasing willingness of consumers to seek credit during this all-important holiday season. Recently released Federal Reserve figures showed a larger-than-expected $14.2 billion increase in consumer credit for October and retailers anticipate greater overall holiday spending that last year.

The bottom line: payday lenders deliver convenience at a high price, even when borrowers might qualify for cheaper loans elsewhere. Any of the sub-prime loan outfits could blow up, of course, as it’s a risky line of business. But even if you can’t bear to watch -- or profit from -- what they’re doing, you have to admire their ability to do it.

Katherine Reynolds Lewis, a contributing editor at YCharts, is a regular contributor to Fortune Magazine online. Her work has appeared in Bloomberg BusinessWeek, Money, MSN Money, New York Times and Slate. She earlier worked as a national correspondent for Newhouse News Service, Bloomberg News' Washington D.C. bureau and the Bond Buyer. She can be reached at editor@ycharts.com.